When Pablo Picasso died in 1973 at the age of 91, he left behind four children, more than 45,000 paintings, sculptures and other works of art, several homes, stocks and bonds and a valuable brand name, but he did not leave a plan for his assets. As a result, his heirs spent six years embroiled in legal battles and $30 million to settle the estate.
Even if your estate is not quite as big as Picasso’s, you need to protect your assets and your heirs, so they don’t end up in probate court. An estate plan helps you provide for loved ones and support the causes you believe in, ensuring your assets are distributed according to your wishes and expenses (including estate taxes) are minimized. But estate planning can be complicated. Here are some common mistakes people make and how to avoid them, so you can achieve your legacy goals.
1 DESIRES ARE UNSPECIFIED
To avoid making the same mistake as Picasso, create a will specifying how you want your estate to be distributed. A will is especially important if you have children who are minors, because it allows you to indicate who should take guardianship of your children.
In addition, your will also indicates who you select as executor of your estate. Oftentimes, people choose a family member or friend they feel is objective, responsible and trustworthy. It’s a good idea to choose someone younger than you and in good health (for obvious reasons), as well as an alternate in the event your chosen executor is unable to fulfill his or her obligations. And, it is often preferable to choose someone who resides in the state where your will is probated. There can be a lot of responsibility and time involved in administering an estate, so make sure the executor you choose is willing to accept the responsibilities involved. If you cannot identify a friend or loved one you feel is qualified and willing to handle the job, you can turn to a knowledgeable professional.
2 HEIRS ARE UNPREPARED
Avoiding the topic of death leaves your survivors struggling to pick up the pieces during a time that is already emotionally difficult. Your heirs need to know where you keep important documents, such as legal documents, recent account statements and the location of your safe deposit box.
It’s a very good idea to provide your heirs with a letter of instruction that also includes detailed information such as a list of your professional advisors, contact information for your employer’s human resource department (for retirement plan and other benefits), a list of your assets and life insurance policies and where to find them (along with electronic passwords, kept in a safe place so they cannot be accessed by others). Otherwise, your heirs will have to search for, and may never find, some of your assets.
3 TRUSTS ARE UNFUNDED, ASSETS IMPROPERLY TITLED, OR BENEFICIARIES IMPROPERLY DESIGNATED
The assets held in a revocable trust, also known as a living trust, transfer to heirs privately avoiding the time and cost of probate. However, when you set up a revocable trust, you need to retitle the assets in the name of the trust so that the assets are governed by the trust agreement. Unfunded trusts or assets not properly titled can result in unnecessary probate expenses.
It is also extremely important to make sure your beneficiaries are designated properly so you don’t inadvertently undermine your estate planning intentions or cause negative tax consequences for your heirs. For example, if your retirement account does not have a designated beneficiary, your estate may become the beneficiary resulting in immediate additional taxes; whereas, a designated beneficiary will generally receive more favorable income tax treatment.
4 PORTFOLIO IS UNBALANCED
There are many reasons you may have an overly concentrated investment position, which can put your legacy at risk. If you or your spouse are a senior executive, you may hold a disproportionately large position of company stock. You may have received an inheritance, have a holding that has appreciated significantly over time or continue to invest in a company or asset class you believe in.
A highly concentrated stock position may expose you and your heirs to undue risk and volatility, increasing the possibility your heirs may need to sell when your portfolio is down. You can reduce the potential for risk without reducing the potential for return by rebalancing your portfolio periodically to ensure it is sufficiently diversified for your wealth goals. However, selling appreciated assets can result in taxable gains, so there may be tax consequences to rebalancing. A financial advisor can help you implement tax minimization strategies (such as selling investments with a higher cost basis or rebalancing through tax-advantaged accounts).
5 ESTATE PLAN IS UNCHANGED
Over the course of time, significant life events or changes to the tax landscape can greatly impact your estate plan. Be sure to review your plan after a significant change in your circumstances, or at least every three to five years and make modifications, as needed, to ensure your plan is consistent with your evolving legacy goals. Major life events that can affect your estate plan include:
• Change in marital status or domestic partnership (make sure your children are protected to avoid loss of inheritance)
• Birth of child or grandchild
• Death of beneficiary
• Launching or selling a business
• Loss or acquisition of assets (such as an inheritance) resulting in a change to your net worth
• Change of your intentions (i.e., choosing a different guardian for your children or executor of your estate, or naminga charity as a beneficiary)
• Changes in tax laws
Don’t Put Your Estate at Risk
You want to avoid making estate planning mistakes to protect your loved ones, but creating and maintaining an effective plan can be complicated. Luma Wealth can help you achieve your legacy goals.